Weaker Dollar Against Euro Weighs on Treasuries

Treasuries are weaker this morning, despite a larger-than-expected May trade deficit that has economists trimming their second-quarter

GDP

estimates, and despite a currency-market intervention by the

Fed

on behalf of the

Bank of Japan

which has sharply boosted the dollar against the yen.

The trouble is twofold. Also in the currency market, the euro is ever-stronger against the dollar, as traders who went short the euro thinking it would reach parity with the dollar continue to cover that position. The dollar may be stronger against the yen this morning, but the euro's stronger still against the dollar, and a weaker dollar can weigh on Treasuries.

Meanwhile, trading is exceedingly light, with yesterday's

volume in the Treasury futures contracts exchanged on the

Chicago Board of Trade

hitting the second-lowest level for the year. (

April 5 was the lightest-volume session of the year so far.)

This is in large part because Fed Chairman

Alan Greenspan

is slated to give major testimony on the economy and monetary policy on Thursday, and many traders are sidelined ahead of it.

"The real story is that people are waiting for Greenspan,"

Donaldson Lufkin & Jenrette

Treasury market strategist David Ging said. Given the continuing low volume, "it's hard to make too much of today's activity."

The benchmark 30-year Treasury bond was lately down 10/32 at 90 19/32, lifting its yield a basis point to 5.93%.

On the currency front, the dollar is some 0.8% stronger against the yen, at 119.22 yen lately, after the Fed bought dollars in the currency market at least twice, beginning at around 9:30 a.m. EDT. Dollar/yen closed yesterday at 118.18. But the dollar's a full 1% weaker against the euro this morning at $1.0415 lately, compared to $1.0310 at yesterday's close. And today's euro gains come on top of similarly large gains

yesterday.

On the economic data front, the trade deficit ballooned to $21.3 billion in May, a new record, from $18.6 billion in June. Imports surged 2.2% while exports fell 0.8%, according to the government's

international trade

report. Economists surveyed by

Reuters

had forecast a smaller rise in the trade deficit, to $19.2 billion, and the larger figure will force them to revise their second-quarter growth forecasts down, since net exports (the trade deficit, that is) are subtracted from GDP. For example,

Daiwa Securities

chief economist Michael Moran said in a published comment that he is revising his forecast to 3% from 3.75%.

It's not unusual for market reaction to the trade report to be muted, however, since the data are pretty old by the time they're released, and have nothing to say about the future.